‘There are some parallels between the GFC in 2008 and the current downturn – a period of strong economic growth with an abundance of liquidity in the market ended with a sudden economic shock with strongly reduced availability of capital also - or even especially - for real estate,’ notes Hubers. Yet he adds that ‘the differences, however, may be bigger than the similarities’.

‘There is more equity in the system. Whereas LTVs up to 80% were not uncommon in 2008, banks have become more disciplined and senior debt is now much more limited to the tune of 55-60% of the balance sheet. Equity is a more suitable capital instrument to absorb shocks.’

Tighter regulation
Another key difference is the regulatory environment, Hubers remarks. ‘Regulation has become tighter. Banks are obliged to hold more capital against their loans in general and real estate exposure as well. As such, banks too have become more resilient to headwinds.’

For Huber, the third, differentiating element is the rise of alternative lenders over the past decade, such as debt funds and insurers. ‘Next to that, the market has become more internationalised. Even if availability of bank debt becomes scarcer, there are more alternatives available to investors than there were 15 years ago.’

Finally, Hubers points out that the economic fundamentals are relatively robust. ‘The majority view is that we will have a recession but that it will be relatively mild. This confidence is fuelled by the notion that labour markets are still relatively tight, and unemployment is not a big issue. Also, sovereign debt is under control in a number of major markets, implying that governments are willing and able to support the economy to absorb and adapt to shocks rather than be forced to go into austerity.’

Yet he adds a footnote. ‘Cap rates/initial yields have come down sharply over the last decade and are now substantially lower than in 2008. Increased interest rates may therefore have a bigger impact on values. It remains to be seen what the amount of yield decompression will be and to what extent it will be counterbalanced by rent growth on the back of inflation.’

Despite this note of caution, Hubers is convinced that the steep climbs in interest rates seen in 2022 will not be repeated this year. ‘Inflation has started to come down as of late last year and recession concerns are more prominent now. That has caused a halt in interest rate rises on the longer end of the curve. For this year, we expect rates in the eurozone to plateau and in the US, we even think that substantially lower rates could emerge towards the end of the year (think of a 3% US 10-year yield). That should alleviate the strain on the real estate market to a degree of course, but at the same time we will still see some of the impact of higher interest rates on the sector materialise.’

Hubers also highlights that credit spreads for European real estate are not expected to fall much either, ‘which makes it unlikely that funding levels will come down much this year. So, while another interest rate shock like we saw last year is likely to be avoided, downside risks for the sector do remain apparent’.

Developer woes
Despite his generally optimistic outlook, Hubers identifies a ‘triple whammy’ for developers looking for funding this year. ‘Land and construction prices were on the rise until 6-12 months ago and have not necessarily come down yet as developers of commercial real estate to a certain extent compete for land and building capacity with infra projects that are still high in demand,’ he notes. ‘Meanwhile, the cost of capital has gone up and the price value of their products is falling.’

He concludes: ‘In this environment, I think availability of development finance will become more scarce and more expensive. As there is always a silver lining, it may also mean that there will be less competition for those developers that have older land positions that they now can bring to fruition with less competition.’